UPDATE - SCO lawsuits target DaimlerChrysler, AutoZone

FRAMINGHAM (03/03/2004) - As it has threatened since late last year, The SCO Group Inc. has filed its first lawsuits against enterprise Linux users, targeting automaker DaimlerChrysler AG and auto parts retailer AutoZone Inc. In an announcement made late this morning, Lindon, Utah-based SCO said it would file suit later Wednesday against DaimlerChrysler in Oakland County Circuit Court in Michigan.

That lawsuit alleges that DaimlerChrysler violated its software licensing agreement with SCO by refusing to provide a requested "certification of compliance" as part of a software audit. The suit asks the court to permanently bar the automaker from further violations of the software agreement and seeks an injunction requiring it to "remedy the effects of its past violations" of the agreement.

The suit seeks undetermined damages. SCO officials were slated to discuss the legal action during a conference call at which they also planned to talk about the company's latest earnings report.

Earlier Wednesday, in a separate announcement, SCO said its suit against AutoZone alleges that the retailer violated SCO's Unix copyrights through its use of Linux. That suit charges that AutoZone is "running versions of the Linux operating system that contain code, structure, sequence and/or organization from SCO's proprietary Unix System V code in violation of SCO's copyrights."

With this lawsuit, SCO is kicking off what it said late last year will be an offensive against companies using Linux in their businesses. SCO sued IBM Corp. last March in a suit that now seeks at least US$5 billion in damages, alleging IBM illegally contributed some of SCO's System V Unix code to the Linux open-source project. IBM has countersued.

AutoZone is an IBM customer, using IBM's content management and DB2 database applications, and a former Red Hat Linux customer, having used Red Hat Linux for its in-store intranet system.

The lawsuit, filed in U.S. District Court in Nevada, seeks undisclosed damages and a court injunction to prevent AutoZone from continuing to use or copy any part of SCO's copyrighted materials.

Ray Pohlman, a spokesman for Memphis-based AutoZone, said the company has not yet seen the lawsuit so he could not comment. "It is our understanding, however, that SCO has sent letters to hundreds of companies, making similar allegations," he said. Pohlman would not discuss how AutoZone uses Linux inside its business.

Mary Gauthier, a spokeswoman for DaimlerChrysler, declined to comment because the company has not yet received the lawsuit. But information on IBM's Web site indicates that DaimlerChrysler has been using Linux and a 108-node IBM server cluster for vehicle crash analysis and simulation since 2002.

AutoZone was a SCO customer as recently as 2002 and once ran SCO Unix on point-of-sale systems in its approximately 500 stores around the country.

SCO chose Wednesday -- when both it and AutoZone announce their quarterly financial results -- to file its lawsuit.

In response to the lawsuit, the nonprofit Open Source Development Labs Inc. (OSDL) in Beaverton, Ore., reiterated its standing offer of help to AutoZone and any future targets of lawsuits from SCO through its open-source legal defense fund, which was established in January.

"The entire Linux ecosystem, including OSDL and its 35-plus member organizations, will stand firm against any legal actions against Linux end users made by the SCO Group," Stuart Cohen, CEO of the OSDL, said Wednesday in a statement. "This is why OSDL announced our defense fund in January. SCO's decision to move forward with (its) end-user lawsuit is unfortunate, but due to the questionable merits of the case, we see no reason why this case will have an impact on the growth of Linux in the enterprise."

The defense fund, which has collected more than $3 million toward its goal of $10 million, was set up by the OSDL to help defend Linux users from copyright-infringement lawsuits that might be filed against them by SCO.

For the first quarter of fiscal 2004, SCO posted revenue of $11.4 million, compared with $13.5 million one year ago. SCO reported a net loss to common stockholders of $2.25 million, or 16 cents per diluted common share, compared with a net loss to common stockholders of $724,000, or 6 cents per diluted common share, for the same quarter last year.

In Wednesday's financial conference call with analysts and reporters, SCO CEO and President Darl McBride said the lawsuits were filed because the two companies failed to respond adequately to SCO's warnings that violations of its intellectual property (IP) would no longer be tolerated.

"DaimlerChrysler is one of thousands of companies that have source code and or source reference licensing agreements with SCO," McBride said. "These agreements ... describe the terms under which the licensee may use Unix System V, as well as the derivative works. At the beginning of December last year, SCO notified thousands of these licensees (by letter) of their obligations under these agreements. Some companies responded appropriately and certified their compliance with the terms of the agreements. Some companies, including DaimlerChrysler, have failed to respond appropriately."

McBride said he sees "similarities" to SCO's IP concerns and those of the music recording industry, which has been pursuing lawsuits against individual users for allegedly violating the IP rights of recording companies. "We believe that the legal actions that we have taken and will continue to take will have a similar impact on end users of Unix and Linux," he said.

McBride said SCO's copyright claims in these cases "relate to core operating system functionality of essential root structure and sequences of Unix System V that was used in the design of Linux."

On Monday, SCO announced that dedicated server hosting vendor EV1Servers.net in Houston signed an IP licensing agreement to shelter the hosting provider's customers from any future Unix or Linux IP claims (see story). McBride said he expects similar deals to follow Wednesday's lawsuits.

"If people would prefer to work through the court system, then we'll file a complaint and we'll work through the court system," he said. "Depending on which way customers want to go, we'll accommodate their desires."

McBride did not respond directly when asked if SCO would eventually refund any licensing fees if his company should lose its case.

Financial analyst Dion Cornett at Decatur Jones Equity Partners LLC in Chicago said after the conference call that the two new cases will be difficult for SCO to prove.

"They discussed potentially AutoZone's use of some specific types of files (or) shared source libraries," but AutoZone claims they don't use those files, Cornett said. "Without knowing what building blocks AutoZone is using, the claim looks something like a fishing expedition."

Bill Claybrook, an analyst at Harvard Research Group, in Harvard, Mass., said that while SCO is now carrying out its threats to go after enterprise Linux users in court, the ultimate success of the effort remains to be seen.

"I don't think they're going to get anywhere," Claybrook said. "They have actually struck with some good-sized customers here. But I don't think anybody's going to rush out and buy a license for it.

"It's basically another attempt to wrangle money out of people," Claybrook said.

The whole scenario could in fact backfire, he said, if the target companies file countersuits at SCO, which would be very costly for the company. "I don't see how they can afford it," he said.

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